LARS P SYLL

Are economists rational?

Now consider what happened in November 2007. It was just one month before the Great Recession officially began …

Economists in the Survey of Professional Forecasters, a quarterly poll put out by the Federal Reserve Bank of Philadelphia, nevertheless foresaw a recession as relatively unlikely. Intead, they expected the economy to grow at a just slightly below average rate of 2.4 percent in 2008 … This was a very bad forecast: GDP actually shrank by 3.3 percent once the financial crisis hit. What may be worse is that the economists were extremely confident in their prediction. They assigned only a 3 percent chance to the economy’s shrinking by any margin over the whole of 2008 …

Indeed, economists have for a long time been much to confident in their ability to predict the direction of the economy … Their predictions have not just been overconfident but also quite poor in a real-world sense … Economic forecasters get more feedback than people in most other professions, but they haven’t chosen to correct for their bias toward overconfidence.

Macroeconomic fallacies

Fallacy 8

If deficits continue, the debt service would eventually swamp the fisc.

Real prospect: While viewers with alarm are fond of horror-story projections in which per capita debt would become intolerably burdensome, debt service would absorb the entire income tax revenue, or confidence is lost in the ability or willingness of the government to levy the required taxes so that bonds cannot be marketed on reasonable terms, reasonable scenarios protect a negligible or even favorable effect on the fisc … A fifteen trillion debt will be far easier to deal with out of a full employment economy with greatly reduced needs for unemployment benefits and welfare payments than a five trillion debt from an economy in the doldrums with its equipment in disrepair. There is simply no problem …

Fallacy 14

Government debt is thought of as a burden handed on from one generation to its children and grandchildren.

Reality: Quite the contrary, in generational terms, (as distinct from time slices) the debt is the means whereby the present working cohorts are enabled to earn more by fuller employment and invest in the increased supply of assets, of which the debt is a part, so as to provide for their own old age. In this way the children and grandchildren are relieved of the burden of providing for the retirement of the preceding generations, whether on a personal basis or through government programs.

This fallacy is another example of zero-sum thinking that ignores the possibility of increased employment and expanded output …

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These fallacious notions, which seem to be widely held in various forms by those close to the seats of economic power, are leading to policies that are not only cruel but unnecessary and even self-defeating in terms of their professed objectives …

We will not get out of the economic doldrums as long as we continue to be governed by fallacious notions that are based on false analogies, one-sided analysis, and an implicit underlying counterfactual assumption of an inevitable level of unemployment …

If a budget balancing program should actually be carried through, the above analysis indicates that sooner or later a crash comparable to that of 1929 would almost certainly result … To assure against such a disaster and start on the road to real prosperity it is necessary to relinquish our unreasoned ideological obsession with reducing government deficits, recognize that it is the economy and not the government budget that needs balancing in terms of the demand for and supply of assets, and proceed to recycle attempted savings into the income stream at an adequate rate, so that they will not simply vanish in reduced income, sales, output and employment. There is too a free lunch out there, indeed a very substantial one. But it will require getting free from the dogmas of the apostles of austerity, most of whom would not share in the sacrifices they recommend for others. Failing this we will all be skating on very thin ice.

William Vickrey Fifteen Fatal Fallacies of Financial Fundamentalism

Sweden’s equality fades away

           Source

Sweden, which has long been the shining example for liberal economists of what we should be aiming for, seems to be losing its luster.

That’s because the growth in Swedish inequality between 1985 and the late 2000s was the largest among all OECD countries, increasing by one third:

Sweden has seen the steepest increase in inequality over 15 years amongst the 34 OECD nations, with disparities rising at four times the pace of the United States, the think tank said.

Once the darling of the political left, heavy state control and wealth distribution through high taxes and generous benefits gave the country’s have-nots an enviable standard of living at the expense of the wealthiest members of society.

Although still one of the most equal countries in the world, the last two decades have seen a marked change. Market reforms have helped the economy become one of Europe’s best performers but this has Swedes wondering if their love affair with state welfare was coming to an end.

The real tipping point came in 2006 when the centre-right government swept to power, bringing an end to a Social Democratic era which stretched for most of the 20th century.

Swedes had grown increasingly weary of their high taxes and with more jobs going overseas, the new government laid out a plan to fine-tune the old welfare system. It slashed income taxes, sold state assets and tried to make it pay to work.

Spending on welfare benefits such as pensions, unemployment and incapacity assistance has fallen by almost a third to 13 percent of GDP from the early nineties, putting Sweden only just above the 11 percent OECD average.

At the other end of the spectrum, tax changes and housing market reforms have made the rich richer.

Since the mid-80s, income from savings, private pensions or rentals, jumped 10 percent for the richest fifth of the population while falling one percent for the poorest 20 percent.

David Ruccio

Bobubblelogik

Enligt den senaste Boprisindikatorn – maj 2013 – spår en majoritet av hushållen fortsatt stigande bostadspriser. Av de tillfrågade hushållen svarar 58 procent att de tror på stigande bostadspriser under det kommande året. Andelen som tror på fallande priser är 13 procent.

Trots finanskris och oro över euron så kommer detta troligen att innebära att svenskarna fortsätter att låna mer och mer för att köpa bostäder – och ytterligare spär på den skuldvolym som bara under de senaste tre åren ökat med över 30 %.

Varje sansad bedömare inser att detta är ett problem som måste lösas innan bostadsbubblan spricker.

Men varför har husprisbubblan uppstått? Det finns flera olika förklaringar till detta, men en av de mer centrala mekanismerna går lättast att förklara med hjälp av följande arbitrageargument:

Anta att du har en summa pengar (A) som du vill investera. Du kan antingen sätta in pengarna på banken och få en årlig ränta (r) på pengarna. Om vi för enkelhetens skull bortser från eventuella risker, tillgångsdepreciering och transaktionskostnader ska r*A motsvara den inkomst jag alternativt skulle kunna erhålla om jag istället köper ett hus med en insats på A och hyr ut mitt hus under ett år till en hyra på h plus förändringen i huspriset (dhp), dvs:

(1)  r*A = h + dhp

Dividerar vi båda sidor med huspriset (hp) får vi

(2)  hp = h/[r*(A/hp) – (dhp/hp)]

Ur ekvationen framgår då klart att om du förväntar dig att huspriserna (hp) ska stiga, så kommer priset på huset att stiga. Den här typen av självgenererande kumulativ process är kärnan i själva husbubblan. Till skillnad från vanliga varumarknader där efterfrågekurvan i regel är nedåtlutande, har vi på tillgångsmarknader ofta en efterfrågekurva som är uppåtlutande och därigenom ger upphov till den här typen av icke-stabilitet. Notera också att ju större hävstångseffekter vi har (ju lägre A/hp), ju större blir prisstegringen.

Egeninsatsen vid husköp är i Sverige realiter fortfarande extremt låg. Det innebär att hävstångseffekterna blir desto större. Mot bakgrund av den svåra internationella ekonomiska situationen tvingas Riksbanken hålla relativt låga räntor. Som i sin tur leder till ännu högre bostadspriser och ännu högre hävstångseffekter. Och ännu större bostadsbubbla.

Med en egeninsats på 20 kan du köpa ett hus som är värt 100. Hävstången är 5 och om priset på bostaden stiger 10% ökar dina tillgångar med 50% – men om priset på bostaden sjunker med 10% minskar å andra sidan dina tillgångar med 50%. När tillgångspriser väl börjar sjunka ger de höga hävstängerna upphov till en kumulativ prissänkningsprocess där ökad osäkerhet och volatilitet snabbt kan leda till ökade krav på säkerheter och egeninsatser. Bostadsbubblan spricker och krisen står för dörren.

Vad bör göras? Den amerikanske Riksbankschefen under 1950- och 1960-talen – William McChesney Martin – lär skämtsamt ha sagt att en centralbanks främsta uppgift är att se till att ta bort bålskålen när festen börjar komma igång. Festen har pågått alldeles för länge redan. För att undvika en bokrasch motsvarande den i USA för fem år sedan krävs krafttag av riksbank och regering.

Sverige har sedan åtminstone mitten på 1990-talet haft en klart stigande trend när det gäller tillgångspriser. Det syns också i den internationellt sett extremt höga skuldsättningen i hushållssektor:

IS-LM basics in less than 16 minutes

The Great IS-LM Obfuscation

Thirty years ago – as a young research stipendiate in the U.S. – yours truly had the great pleasure and privelege of having Hyman Minsky as teacher. He was a great inspiration at the time. He still is.

The concepts which it is usual to ignore or deemphasize in interpreting Keynes – the cyclical perspective, the relations between investment and finance, and uncertainty, are the keys to an understanding of the full significance of his contribution …

The glib assumption made by Professor Hicks in his exposition of Keynes’s contribution that there is a simple, negatively sloped function, reflecting the productivity of increments to the stock of capital, that relates investment to the interest rate is a caricature of Keynes’s theory of investment … which relates the pace of investment not only to prospective yields but also to ongoing financial behavior …

The conclusion to our argument is that the missing step in the standard Keynesian theory was the explicit consideration of capitalist finace within a cyclical and speculative context. Once captalist finance is introduced and the development of cash flows … during the various states of the economy is esplicitly examied, then the full power of the revolutionary insights and the alterntive frame of analysis that Keynes developed becomes evident …

The greatness of The General Theory was that Keynes visualized [the imperfections of the monetary-financial system] as systematic rather than accidental or perhaps incidental attributes of capitalism … Only a theory that was explicitly cyclical and overtly financial was capable of being useful …

As all students of economics know, time is limited. Given that, there has to be better ways to optimize its utilization than spending hours and hours working through or constructing irrelevant economic models. I rather recommend my students to allocate some time to study great forerunners like Keynes and Minsky, helping them to construct better, real and relevant economic models – models that really help us to explain and understand reality.

Freshwater macroeconomics – where do we unload the garbage?

There is also a practical problem, if economics as a discipline is to survive. There is a huge amount of junk in the peer-reviewed economics literature–the reviewing process is no protection when the reviewers themselves are prejudiced. A comparison that comes to mind is the collapse of “scientific” eugenics. There were vast amounts of that written, and now it is only read as an object example of the capture of a social science by prejudice and authoritarianism. For economists, meantime, there is a huge task ahead: the garbage must be taken out; removed from the field’s teaching, textbooks, and policy advice. It will be a generation at least before this is set right, if indeed it can be set right at all.

Advice Unasked

Lars E O Svensson om penningpolitik och bostadsbubblor

I morgon gör Lars E O Svensson sin sista arbetsdag på Riksbanken. I den här intervjun ser Svensson – Sveriges internationellt mest ansedde nationalekonom – tillbaka på sina sex år som vice riksbankschef. Intressant!

Wicksell on market fundamentalism and Pareto optimality

With the advent of neoclassical economics at the end of the 19th century a large amount of intellectual energy was invested in trying to formalize the stringent conditions of obtaining equilibrium and showing in what way the prices and quantities of free competition constituted some kind of social optimum.

That the equilibrium reached in free competition is an optimum for each individual – given prevailing prices and income distribution – was not, however, seen by some economists as making a very strong case for a free market economy per se. It wasn’t possible to prove that free trade and competition gave a maximum of social utility. The gains made in exchange weren’t a manifestation of a maximum social utility.

Knut Wicksell was one of those who criticized the idea of regarding the gain in utility arising from free competition as an absolute maximum. This market fundamentalist idea of harmony in a free market system didn’t live up to Wicksell’s demand for objectivity in science – and  “the harmony economists, who endeavoured to extend the doctrine so that it might become a defence of the existing distribution of wealth” were judged severely by Wicksell (Lectures 1934 (1901) p. 39).

When propounders of the new marginalist theory – especially Walras and Pareto – overstepped the strict boundaries of science and used it in ascribing to the market properties it did not possess, Wicksell had to react. To Wicksell (Lectures 1934 (1901) p. 73) it was

almost tragic that Walras … imagined that he had found the rigorous proof … merely because he clothed in mathematical formula the very arguments which he considered insufficient when they were expressed in ordinary language.

But what about the Pareto criterion? Wicksell had actually more or less anticipated it in his review (in Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, 1913: 132-51) of Pareto’s Manuel, but didn’t think it really contributed anything useful. It was just the same old doctrine in a new disguise. To Wicksell the market fundamentalist doctrine of the Lausanne School obviously didn’t constitute an advance in economics.